Public Bill Committee

[Mr. Jim Hood in the Chair]
Further written evidence to be reported to the House
BAN 04 Financial Markets Law Committee

Clause 65

Power to Change Law

David Gauke: I beg to move amendment No. 119, in clause 65, page 32, line 10, at end insert
, where the Treasury is satisfied that not to do so threatens the stability of, or confidence in, the UK financial system.

Jimmy Hood: With this it will be convenient to discuss the following: Amendment No. 155, in clause 65, page 32, line 15, leave out subsection (3).
Amendment No. 120, in clause 65, page 32, line 39, after (8)(b),, insert
in order to protect the stability of, or confidence in, the UK financial systems.
Amendment No. 121, in clause 65, page 32, line 42, leave out from days to beginning in line 44.
Amendment No. 156, in clause 65, page 33, line 1, leave out paragraph (c).
Amendment No. 157, in clause 65, page 33, line 5, at end add
(10) No Order under this section may amend subsections (8) or (9)..
Clause stand part.

David Gauke: It is a pleasure to serve under your chairmanship once again, Mr. Hood. Clause 65 has provoked an enormous degree of concern from outside bodies. Pretty well every outside body that has examined this Bill has objected to it. The clause enables the Treasury by order to amend the law contained in this Bill. It allows secondary legislation to amend primary legislation, which is in itself objectionable. There must be at least a presumption that a clause such as thisoften described as a Henry VIII clauseshould be scrutinised heavily and, ideally, removed, unless there is a very, very strong case for its retention.
Before going into the detail of clause 65 and the amendments that we have proposed to ameliorate some of the difficulties, it is worth highlighting again one of the broader problemsperhaps the most importantcontained within this Bill, which is the degree of uncertainty it creates with regard to some transactions. We discussed at some length the safeguards regarding partial transfers when we debated clauses 42 and 43. As I commented on Tuesday, those safeguards are not necessarily well developed. There is a concern in capital markets that the UK could be left with a regulatory regime that will enable the authorities to interfere in transactions, leaving some creditors worse off than they would be otherwise.
It may help if I inform the Committee that since our debate on Tuesday I have had discussions with two lawyers from leading international firms, one of whom told me he was aware of a transaction that was not completed because one party was concerned that the provisions in the Bill created too much uncertainty. The other lawyer told me that she was aware of a transaction that nearly fell through for the same reason. Those cases related specifically to issues of partial transfer but with clause 65, on top of the uncertainty in the Bill as a whole regarding partial transfer, there is uncertainty surrounding the power to change the law by order without proper parliamentary scrutiny. As a practical example of the difficulties this may impose, the lawyers I spoke to have the view that they may need to qualify legal opinion to a client considering a transaction with a UK bank by referring to clause 65. Notwithstanding everything else they may have said about the legal position, there is a risk that the law could be changed very easily by an order. That further complicates the matter. For that practical reason, many outside bodies are concerned about clause 65, as well as for the constitutional reason that Parliament appears to be surrendering its ability to properly scrutinise legislation in that field. Those are strong objections, and I suspect that the Minister will not be able to persuade us that clause 65 is acceptable.
We have made various attempts to improve the Bill and to provide some comfort and certainty to those outside bodies. Amendment No. 119 relates to subsection (1), which is at the heart of the clause. It states that the Treasury has to have regard to the special resolution objectives. That test is insufficiently strong. We propose that in using the exceptional powers the Treasury should, at the very least, be satisfied that not to do so threatens the stability of, or confidence in, the UK financial systems. I dare say that the Minister will point out that the objectives of the special resolution regime touch upon that, but the Treasury merely having regard is not reasonable. The wording is so weak that it seems to attempt to avoid any kind of judicial review of decisions made under the clause. It needs to be toughened up, so that the Treasury is at the very least satisfied that there is systemic risk before using the powers. I would usually say reasonably satisfied, but we have debated that it is not normal to insert reasonable in a provision that applies to a public body. The Treasury should not be able to use the powers as a routine way of trying to improve the legislation. It is the purpose of the Committee to examine and improve the Bill, and it is not appropriate for the Government subsequently to be able to do so, by producing an unamendable order.
Amendment No. 155 relates to subsection (3)yet another objectionable element of the Bill. As the clause stands, an order may make provision that has retrospective effect. Therefore, not only will it be possible to change the law with an order, but that law can be retrospective. I do not need to go into enormous detail to highlight the uncertainty produced by the ability to create retrospective law. Transactions that have been entered into in good faith based on the law as it stands, can be disrupted as a consequence of subsection (3).
Amendment No. 120 to subsection (9) is similar to amendment No. 119. Generally, orders under clause 65 will be made by affirmative resolution. It should, of course, be by such resolution, to the extent that it is acceptable for orders to be made in that way. The subsection allows the Treasury to make orders other than by affirmative resolution, but there is no higher test as to when those orders can be made; it is not necessary that there be a need to protect the stability of, or confidence in, the UK financial systems or that there is systemic risk. The amendment seeks to address that.
The Government also propose that they should be able to make an order in such circumstances during a parliamentary recess. The order would not need to be ratified for 28 days, not counting the period during the parliamentary recess, so it is perfectly possible that the Government could change primary legislation in August by an order that would not be ratified until the House returned in October.

Sally Keeble: How does the hon. Gentleman propose that special measures should be taken? An awful lot of the problems with Northern Rock, and other problems this year, unfolded while Parliament was in recess, and we had to kick our heels because the Government did not have the powers set out in the Bill. How does he propose to deal with crises that occur during our long recess?

David Gauke: The powers do not necessarily require a crisis in order to be used. If it is a genuine crisisin which circumstances there may, at a push, be a case for such provisionsParliament should be recalled, and we should scrutinise the measures properly. What we cannot have is a period of several months every year when there is no parliamentary input.

Sally Keeble: I agree with the hon. Gentleman about the recall, but does he propose that primary legislation should be used? As we have seen, that takes a long time.

David Gauke: I do think that primary legislation should be amended by primary legislation. I disapprove of Henry VIII clauses. We are talking about the ability to amend primary legislation by an order that may occur while Parliament is in recess, with no opportunity for Parliament to take a view at the time, and the subsequent retrospective ratification of that decision, possibly some months later. If we are talking about a genuine crisis, Parliament should be recalled. Indeed, one could argue that Parliament should be recalled much more frequently than it is. If we need to change primary legislation because we face a systemic risk, of course Parliament should be there to debate it. I am grateful to the hon. Lady for agreeing with that in her comments.

Stewart Hosie: Reluctant as I am to agree with the Government on almost anything these days, there is a serious point about the legislation. The hon. Gentleman will recall that in the Northern Rock shambles, one of the difficulties that it faced was the argument that it could not achieve a weekend takeover when it was alleged that there was an early bid from Lloyds TSB. Surely the measures are meant precisely to facilitate immediate action in such circumstances, notwithstanding the difficulties of our being in recess for a prolonged period. Surely that is part of the process.

David Gauke: But the purpose of the Bill is to create the framework for the authorities to act quickly. If the primary legislation is produced properly, we should be in a position to give the authorities the flexibility to deal with crises, yet what we have here is essentially a suggestion that maybe we have not got the Bill right at all, that we might need to make changes as we go along and that every time we face a new crisis we will just make a quick change by way of an order. I fear that that suggests that the Government are not entirely confident with the legislation as it stands.

Colin Breed: Is it not really an admission of the potential failure of all that we have been doing here? Frankly, clause 65 would obviate almost everything else that we have been discussing for the past few weeks, because it would allow it to be changed. Unless we can tighten the clause up considerably to apply to very specific circumstances, leaving it as it is would be wholly inappropriate.

David Gauke: What is proposed is far too broad, even if we recognise that not every piece of legislation is perfect. To accept these provisions, as they currently stand, will create uncertainty. So there is a practical effect. As the hon. Gentleman says, the purpose of these Committee proceedings is to ensure that the Bill is right and not to enable legislation to be easily changed subsequently.

Mark Todd: I have some sympathy with the hon. Gentlemans argument, but it would be extraordinary arrogance on the part of the Government and members of the Committee if they thought that they had produced conclusive answers to a problem that had not been foreseen 12 months ago, and for whichthis deserves a lot of criticismvirtually no planning had taken place. Some realism on the need for flexibility and the opportunity to think afresh would be welcome.

David Gauke: As always, the hon. Gentleman makes a thoughtful point. If there is something wrong with the primary legislation, let Parliament look at it again properly. Clause 65 essentially enables the Treasury to make orders that come into effect potentially long before Parliament has the opportunity to address them. Amendment No. 121 highlights the issue of the recess and the long period of time that may elapse between the passing of the order and an opportunity for Parliament to scrutinise it.
Let me also highlight one of the issues contained within subsection (9)(c), which amendment No. 156 seeks to delete. Even if Parliament eventually gets a chance to scrutinise this change in legislation and to debate an order that has been passed before it has had an opportunity to debate and vote on it, the lapse of such an order
does not invalidate anything done under or in reliance on the order before the lapse and at a time when neither House has declined to approve the order.
That seems a very curious state of affairs. Not only can the Government change primary legislation by an order, but they can change it by an order that has not been debated by the Committee. Furthermore that order can have had effect for two or three months, even though, when Parliament does have an opportunity to vote on it, it defeats it. That is an extraordinary situation to be in.

Sally Keeble: The hon. Gentleman is pulling out one paragraph of a subsection when, as I understand the drafting, all the subsections apply. It is and, and, and. It is not this one, or this one or this one. To take out one paragraph and say that it is the be-all and end-all is quite wrong. It is a misunderstanding of the way that the legislation is drafted and of all the caveats that have been put in to safeguard against the misuse of order-making powers.

David Gauke: I am grateful for the hon. Ladys comment, although I do not agree with her. On the question of safeguards, if she believes in safeguards in subsection (9), I hope that she will support amendment No. 120, which inserts a safeguard that the measures should apply only in the event of a systemic risk. Subsection (9) begins:
But if the Treasury think it necessary.
which is not too great a safeguard, I would suggestit may make an order without complying with the affirmative resolution. The order can be made, but will lapse after 28 days, ignoring recesses. Even if it does lapse, however, nothing done under it is invalidated. Furthermore, under subsection (9)(d), nothing is to prevent the making of a new order, so, conceivably, the Treasury could happily continue making orders every 28 daysit could get defeated, introduce another one and so on ad infinitum.
My point to the hon. Lady is that that is not a set of different conditions, but the order in which things will happen. First, an order will be made without affirmative resolution. Secondly, if it lapses after 28 days, it will be deemed to have been effective before lapsing. That is my objection: in that period, an order changing primary legislation, which Parliament will not have considered, will remain law. If she disagrees with that interpretation, I will happily accept a further intervention.
We have proposed a new subsection (10) stating:
No Order under this section may amend subsections (8) or (9)..
The amendments purpose is merely to highlight the fact that if clause 65 can enable the Bill to be amended, it could presumably amend the safeguard in clause 65(8), which does at least say that any amendment should be made by affirmative resolution. Presumably, however, the Government could use the affirmative resolution to scrap subsection (8), and from then on the negative resolution only would be used. That does not provide much of a safeguard.
The clause creates great constitutional difficulties, and we in Parliament take such matters very seriously. Some in the outside world are enormously concerned about the way in which the clause injects uncertainty into the system. We already criticise the Bill for causing concerns about partial transfers. That is not a theoretical concern: already transactions are not happening as a consequence. We debated that on Tuesday, and I think that the Government recognise this issue and have made some movement on the safeguards contained in the order-making powers in clauses 42 and 43. However, we have pressed them for more movement, but we are seeing none on clause 65, which undermines the certainty that the capital markets require. Clearly, anything that we can do to try to address that has to be of benefit. It is a practical issue, and the Government do not appear to be moving. Depending on what the Minister says, we will be inclined to press some of our amendments. Unless there is movement, the uncertainty will only increase. I am afraid that clause 65 is already having a damaging impact on the competitiveness of the UK capital markets.

Colin Breed: I do not want to repeat what the hon. Gentleman said, but I wish to be associated entirely with his comments on the clause. He and his colleagues probably went through the same exercise as we did in attempting to make the clause acceptable by dispelling some of the obvious problems that it causes owing to lack of confidence. The amendment is similar to others that we have tabled, in the sense that we have tried to create some hurdles so as to get an idea of when those powers will be used. The amendment, as drafted, is an excellent attempt to do that, and if the hon. Gentleman presses it I will certainly support him.
As hon. Members will know, we tabled an amendment to delete the entire clause, because I find the first few words wholly unacceptable:
The Treasury may by order amend the law.
The Treasury might well be the fount of all knowledge and wisdom, although that has perhaps not been so clearly displayed in recent times, but frankly it is not here to amend the lawwe are. I am in principle against that and so will vote against the clause en bloc if given the opportunity to do so on stand part.
I recognise that to a certain extent the clause is written in what we might call a wartime situation. These are extremely uncertain and difficult moments, and almost daily we are regaled with even more horrors of the impending doom and gloom of the next year or two. The banking industry is still in a state of flux, and I accept that we do not know that things will settle down to such an extent that those powers will not have to be used. However, the Bill and those powers are intended to be enduring, so it is intended to address not only wartime situations, but peacetime situations. In a future peacetime situation, such a provision will be wholly unacceptable and have enormous unintended consequences in the capital markets.
At the minimum, we should be looking for such provisions to endure for a limited period, and a two or three-year sunset clause would at least give us the opportunity to review how those powers have operated, and to look, hopefully in a more measured way, at the financial landscape at the time to see whether those rather draconian powers continue to be necessary. I accept that there has been a valiant attempt to establish a clearer sense of when those powers will be used, but as it stands I still find the concept of the Treasury amending the law by order unacceptable, so I will support the amendment if it is pressed and vote for the removal of the clause on stand part.

Sally Keeble: I shall be brief. Aside from some of the specifics, there is an important general point to be made. As the scale and nature of the crisis has unfolded over the past year, one of the things that we have seen is how very fast-moving and innovative the industry is. The legislation attempts to give a statutory framework for dealing with the problems in an orderly way, but there might be a slight culture clash with a fast-moving and innovative industry because, despite the best will in the world, drawing up legislation is by nature a slow and cumbersome process. Unless we have such a provision to enable the Treasury to adapt to changing and perhaps unforeseen circumstances, we will be passing legislation that might be fit for purpose for the last crisis but which will not enable the Treasury to deal with the next one. Although I have many reservations about governmental order-making powers, I think that something of that kind is needed in the circumstances.
Amendment 119 would add to subsection (1) the words
where the Treasury is satisfied that not to do so threatens the stability of, or confidence in, the UK financial system.
However, the subsection already includes that proviso, because it refers back to the special resolution objectives set out in clause 4(4) to clause 4(8), which we have already discussed at some length, and agreed on. They cover exactly the kind of points that, I think, the hon. Member for South-West Hertfordshire intends amendment No. 119 to cover.
There is also a restriction on the powers. There are not unfettered powers for anyone in the Treasury to do whatever they feel like. There is a discussion of the general purpose of the exercise of the powers, and which powers can be used. Of course there will always be a need for close scrutiny, and perhaps a suspicion that the Government are using powers to do what they want, without having thought things through clearly in the legislation. However, the clause starts with the general objective, which is more or less what the hon. Gentleman has set out in his amendment, then it defines the powers that can be used and the general purposes. It narrows things down to provide the democratic and parliamentary scrutiny, then it narrows them down further to set out some of the process that should be used.
The issue that must, of course, be dealt with is that the industry will say, This creates uncertainty. We need more reassurances that the powers will not be used perversely. Governments are not supposed to do that anyway. That applies to any order-making powers, and there are legal processes for challenging perverse decisions. However, it may be helpful if my hon. Friend the Minister can further explain the thinking about the circumstances that are relevant, or the assurances that the industry might need to make it clear that the powers, which are necessary, would be used only in realistic circumstances.
As a general point, it was appalling that hon. Members were in recess and nothing could happen while economic circumstances changed, and that events that would most affect our constituents unfolded while we were not here. We could not engage in any scrutiny. Also, we knew that if anything were to be done, it would need primary legislation. We all know how cumbersome that is. I welcome the fact that the Government would have a range of powers at their disposal. We have had the chance to discuss that, and there is provision for accountability to Parliament, and for proper scrutiny. Such powers are never particularly welcome, but the hon. Gentlemans amendments are covered, and his concerns dealt with, and what remains is for my hon. Friend to give the industry some assurances about some of the circumstances.

Ian Pearson: I hope, indeed, to give assurances to the industry and to others who follow such matters closely, and to clarify the situation for hon. Members.
I want first to explain why clause 65 is needed, and then I shall discuss the amendments. Banks often comprise complex, multi-jurisdictional corporate entities. As financial markets continue to develop, the trend is set to increase. Furthermore, many of the provisions of the special resolution regime interact and sit alongside complex financial services, banking, company and insolvency law. The special resolution regime, which, I remind members of the Committee, is a new legislative device, provides the authorities with powers to act with respect to failing banks.
Those are not banks that are functioning successfully and in normal conditions. They are banks that are sufficiently failing to meet the general conditions for intervention and which it is in the public interest to resolve. It is inevitable that there will be conflicts between the public interest objectives and resolving a bank in severe financial distress. Moreover, the provisions of legislation are designed to work in relation to a normally functioning business.
In the absence of a power to amend legislation, as set out in clause 65, there is a material risk that the authorities may not be able to fully effect a transfer, which could impact on the effectiveness of the powers taken in the Bill. That could have adverse implications for financial stability or public funds, which would not be in the public interest.
The purpose of the power is to provide the Treasury with the means to modify legislation to enable the powers of the SRR to be used more effectively. That is set out in subsection (1). However, it is not a general power to amend legislation; it is targeted and limited. In particular, the power may be used only to facilitate the use of one of the stabilisation options. Therefore, the scope of the power is severely constrained to amending legislation, which affects the resolution of banks under the SRR.
In broad terms, there are two ways in which this power can be used. The first way would be for the Treasury to make a specific amendment to a piece of legislation for the purposes of making effective the resolution of a specific bank. The amendment would apply only to the specific bank. It would be localised to the particular resolution. It would not apply to any other bank, or any other banks in respect of which the powers of the special resolution regime were used.
The second way would be for the Treasury to make an amendment to legislation that applied to all resolutions or a class of resolutions carried out under the SRR. For example, the power could be used to disapply a particular provision of the Companies Acts in relation to bridge banks. That would then apply in each resolution in which the Bank of England used the bridge bank tool. It will not apply to other banks.
It is envisaged that that form of modification will be made in the light of resolution experience. For example, it might become clear that a certain provision of legislation is an impediment to resolution in general, and so it is beneficial to disapply it for all subsequent resolutions. The ability to make such amendments limits the need for resolution-specific amendments, and ensures that the tools of the special resolution regime may be future-proofed as the financial markets and banks develop over time.
Regardless of how the power is used, the modification may apply only to a bank subject to the stabilisation option. Modifications do not apply to any other bank. So, for example, the power could not be used to take action with respect to banks participating in any aspect of the recapitalisation process. As no stabilisation power has been used or is proposed to be used on those banks, clause 65 is not applicable.
There is also an appropriate level of parliamentary scrutiny of the use of the power, which is subject to the affirmative resolution procedure. However, in situations of urgency, the Treasury may make the order subject to the 28-day procedure. That is because there may be circumstances in which a transfer needs to be made at extremely short notice, and it is necessary to modify aspects of legislation to make it effective. Any prior requirement for each House to approve a draft order in such circumstances before it may come into force would cause delay, during which time the Treasury would be unable to take the necessary steps to address the failing bank. That could potentially lead to severe disruption in the financial markets, place public funds at unacceptable risk, and exacerbate financial instability.

Sally Keeble: Can my hon. Friend confirm that if the power goes through the affirmative procedure, because of the way in which the days are counted and our recesses fall, it could take some months to get an order through? That would be completely counter-productive in light of the speed needed for many of these processes.

Ian Pearson: My hon. Friend makes a good point. The hon. Member for South-West Hertfordshire raised it in relation to amendment No. 121. He suggested that the 28-day clock would start ticking only when Parliament returns after the recess. That is not the case. Parliament can call a debate immediately after the recess, or a decision could be taken to recall Parliament.

David Gauke: I take the point that the debate could happen straight after the recessas the Minister said, there is a 28-day clockbut the measure ignores
periods of dissolution, prorogation or adjournment of either House for more than 4 days.
It would ignore the recess. The 28-day limit imposed by subsection (9) runs only when the House is sitting, does it not?

Ian Pearson: That could be the case, but it is equally true that the clock does not have to start ticking then, and the debate does not have to be within 28 days. My understanding is that it is perfectly possible for Parliament to debate it immediately after a recess, and I think that that is what would happen in normal circumstances.

David Gauke: That is not what the clause says.

Ian Pearson: If I may move on, hon. Members may be aware that it is not unprecedented for such powers to be taken to ensure that Bills are fully effective, especially where an entirely new regime is introduced in an area already populated by a complex and interrelated body of primary and secondary legislation and common law.
For example, the Safeguarding Vulnerable Groups Act 2006 provides the Secretary of State with a power to make further provision to give full effect to the Act. That power may be used to amend, revoke or otherwise modify enactments. Another example is section 148 of the Criminal Justice and Immigration Act 2008, which includes a power to make consequential amendments to legislation, including primary legislation, to ensure that the Act is fully effective.
I have informed the Committee of the general circumstances in which the power might be used, but it might help if I provided some specific examples. Of course, it is not possible to provide an exhaustive list, because it is not possible to foresee every circumstance surrounding the failure of any particular bank or which pieces of legislation might be relevant to the resolution. If that were possible, there would be no grounds for taking the power, as we could just put all the relevant changes into the Bill. The following examples are intended to give a flavour of how the Treasury might use the power.
Suppose the business of a failing deposit taker is transferred to a private sector purchaser. In some circumstances, it would be appropriate to modify the provisions of part 16 of the Financial Services and Markets Act 2000, which deals with the financial ombudsman scheme, to ensure that consumers could make complaints to the scheme relating to the failing bank and obtain a remedy from the private sector purchaser.
Another example is that it might be necessary to disapply section 169 of the Companies Act 2006, which provides company directors with the right to protest against their removal, with respect to a bank entering the special resolution regime. Although clause 19 provides a power to remove directors, the power under clause 65 could be used to remove a directors right to protest against that removal.

Peter Bone: That is an extraordinary change in the law that is not mentioned anywhere in the Bill. If that is the Governments intention, why on earth is it not in the Bill?

Ian Pearson: The power to remove directors is certainly in the Bill. In such extreme circumstances, we believe that that is absolutely right and appropriate, and we have debated it.

Mark Hoban: The Minister said in his remarks that the Government were looking for the power to remove directors right to protest their removal. If he believes that it is important for the Government to deny directors that right, why is it not in clause 19? When we debated the removal of directors under clause 19 in the context of renegotiating their remuneration, he made it clear that directors would retain their normal legal rights in those circumstances.

Ian Pearson: I remember talking about directors maintaining their legal rights, and I will undertake to discuss with officials whether that should be put in legislation.
A further example relates to shadow directorship. It may be necessary in certain circumstances for the Bank of England or the Treasury to give directions to the board to ensure that the public interest objectives of the resolution are met. That applies in particular to the initial stages of the resolution, when stabilising banking business is paramount and public funds might be at greatest risk. In some circumstances, therefore, it might be appropriate to disapply various provisions of the Companies Acts in relation to the authorities conduct during the resolution, such as shadow directorship.

Mark Hoban: Will the Minister give way?

Ian Pearson: I want to make a little progress. I shall give some real-life examples of shadow directorships.

Mark Hoban: Will the Minister give way on that point?
Ian Pearsonindicated assent.

Mark Hoban: My recollection is that provisions are in place already, in the Banking (Special Provisions) Act 2008, to ensure that the Treasury and the Bank of England do not act as shadow directors. If the Ministers concern is genuine, why not replicate that Acts provisions in the Bill?

Ian Pearson: That is probably why I should not have given wayI was going to explain some of that. Hon. Members might be interested to hear that powers to modify legislation were used in many of the recent resolutions under powers provided by the Banking (Special Provisions) Act. For the transfers of Northern Rock and Bradford & Bingley to the Treasury, the shadow directorship provisions of the Companies Acts were disapplied. For the Bradford & Bingley onward transfer, merger law was disapplied, and for the transfer of the Kaupthing accounts, the powers were used to modify insolvency law to create a simplified version of the bank administration procedure.
Stakeholders have made representations arguing that the power undermines the safeguards that we are putting in place for partial transfers.

Mark Todd: Will my hon. Friend give way?

Ian Pearson: Let me make this crucial point first.
The power will not be used by the Treasury or others to modify provisions or safeguards in the Bill. That would not be appropriate, and the Government have no intention of using the power in that way.

Mark Todd: I can see why my hon. Friend hesitated to give way. He makes a persuasive case for the principle of providing for substantial flexibility in the Bill in order to respond to unforeseen events. However, he was not so persuasive on the wording of the clause. Although I shall vote for the clause, if necessary, because I agree with it in principle, we have an opportunity, based on the important qualifications he made in his speech, to sharpen the wording to reassure those concerned about parliamentary accountability and those in the industry about the security of some of the decisions that they might make.

Ian Pearson: As always, my hon. Friend makes a very helpful contribution.
On the point about the position of directors, Members will be aware that clause 19 provides powers to vary service contracts or to remove directors. Clause 65 enables consequential changes to be made to facilitate the resolution. I hope that makes the matter clear but, as I have said, I shall talk further with officials about that matter.
On the point about 28 sitting days, nothing prevents Parliament from holding a debate on an affirmative resolution earlier in the 28-day period following a recess. Legally, and if desired, there could be a period of up to 28 days, but I cannot believe that business managers, if something was controversial, would not want to[Laughter.]

Jimmy Hood: Order.

Ian Pearson: I shall now address the amendments, on which I hope that I can reassure the Committee. The issues raised have been dealt with appropriately already in the Bill, but I want to make clear why I do not believe that we should amend the provisions in the manner proposed.
The hon. Member for South-West Hertfordshire proposes, through amendments Nos. 119 and 120, that an additional test be required before the power may be exercisedthat there must be a threat to the
stability of, or confidence in, the UK financial system.
I remind the Committee that the initial transfer will have met the general and specific conditions for action as provided by clauses 7, 8 and 9. Those are high hurdles. As my hon. Friend the Member for Northampton, North pointed out they have to be within the terms of the objectives in clause 4. The fact that the conditions are met for the initial intervention gives the authorities warrant to take the necessary steps to resolve the bank. Given those points, I believe the amendments are unnecessary and, indeed, otiose, as the matter is already covered as part of the Bill.
Amendments Nos. 121, 156 and 157 relate to the procedural provisions of the clause. Amendment No. 157 proposes that the powers provided by the clause may not be used to amend the procedure for making an order under the clause. As I have already said, it is not the Governments intention to amend the provisions of the Banking Bill using that power. It would not be appropriate, nor would the power be construed to have that effect. In particular, secondary legislation cannot be exercised to expand the scope of its enabling powers, and so lift itself up by its bootstraps. I hope I have provided reassurance to Members that this amendment is unnecessary too, as the power cannot be used in the manner about which they are concerned.
Amendment No. 156 suggests that if an order should lapse, the provisions of the order should be invalidated. The amendment removes a standard provision that provides that things done under orders not later affirmed by parliamentary resolution remain valid. The amendment would introduce a high element of risk to using the power. That particularly applies if an order was made under the clause in relation to a transfer of property or securities to a private sector purchaser. In such a situation, a potential acquirer would in all likelihood not be willing to take part in the transaction, given the risk that provisions of the orderwhich could, for example, grant them certain protectionsmight not stand. Therefore, I cannot accept the amendment. The hon. Member for South-West Hertfordshire has been stressing the importance of legal certainty but the amendment would introduce a lot of uncertainty in the process, so I hope he will consider withdrawing it.
Amendment No. 121 makes a technical change to the nature of the 28-day procedure. We have already discussed that and I do not consider it appropriate. Parliament must be given adequate opportunity to approve the resolution.
Amendment No. 155 proposes that the order made under clause 65 may not take retrospective effect. Although the Government recognise that this is a broad power, we consider it an important part of the clause. Retrospective provision may be required in circumstances where a transfer has occurred with particular swiftness, which, as recent events have shown, is perfectly possible. Given the incredibly complex affairs of banks, it may not be possible to identify each and every precise statutory barrier in any given circumstance before making a transfer. For example, if it were necessary to amend a statutory provision that threatened to impede a property transfer, an unacceptable level of legal uncertainty would be likely to arise if the change did not have effect simultaneously with the property transfer. In a fast-burn situation, the due diligence to identify the impediment may not be completed until after the transfer has taken place. For those reasons, it is considered necessary to make retrospective provision from the date of the transfer. I hope my explanations have provided Members with sufficient assurances as to why clause 65 is necessary and should not be amended in the ways they propose.
There are two other points I should like to make. The first is to stress that the Treasury can only amend the law through a statutory instrument that can be struck down by Parliament. Therefore, it is only with Parliaments agreement that we can exercise this power. The Treasury may only amend the law in circumstances when the special resolution regime powers need to be used more effectivelyto stress again the limited nature of the use of the power.
Having reflected on the debate, I want there to be certainty, and for banks to obtain unqualified legal opinions from advisers on their legal rights under contracts across the piece, as the British Bankers Association said in its submission. We are consulting on the partial transfer safeguards, and I hope that my explanations today on the limited nature of clause 65 will be helpful in making clear to the Committee how the clause might be applied. I will, however, ask the expert liaison group whether any changes could be made to this needed clause, to strengthen legal certainty, and if judged necessary I will bring forward amendments on Report.

David Gauke: First, I address the comments made by the hon. Member for Northampton, North on the test in subsection (1). The Minister also touched on the matter. Both he and the hon. Lady referred to clause 4the special resolution objectives. My concern has not been assuaged; the current wording does not address it and therefore my amendment is not otiose. The test for a change to the law is merely that there is regard to the special resolution objectives. I accept that the various tests in clause 4 and elsewhere need to apply to the use of the stabilisation powers, but those tests are not the same as that which applies to whether there is a change in the law under clause 65. The test there is much weaker:
having regard to the special resolution objectives.
I accept that narrows the scope of the test if it has to apply to the use of stabilisation powers, and that the safeguard is also in subsection (2). The Minister elaborated on that, and I accept that it is somewhat helpful. However, it is nothing like as strong a test as that which we propose in amendment No. 119, or for that matter amendment No. 120. That test is specifically to focus on systemic risk, which is the most important objective. The change in the law has to meet that test. I am therefore not persuaded by the Governments arguments.
The hon. Member for Northampton, North pointed out that primary legislation is cumbersome. It is, up to a point, but let us not forget that we put the Banking (Special Provisions) Act through both Houses in two days. Primary legislation can move more rapidly when it needs to.
I now turn to the Ministers comments. His examples were not persuasive for two reasons. First, as my hon. Friend the Member for Fareham pointed out, if the Minister has specific examples in mind, why are they not in the Bill? The Minister may say that they are not exhaustive, but even if they are not, and even if the Minister is convinced that clause 65 has to remain in the Billalthough we are not persuaded that it shouldif there are areas where the Government think they will need flexibility, let us debate them now, and make provision in the Bill. The Ministers examples were not particularly helpful to his case.
The second reason why the Ministers examples were not helpful is that they highlighted the significant matters that we could be talking about. If we are talking about the withdrawal of the usual protections available to directors employment rights, that matter, or at least the framework for it, is sufficiently serious to be dealt with in primary legislation. I do not think that I was present for the Committees debate on directors employment, but if the Minister was arguing that those protections will still existthe point alluded to by my hon. Friend the Member for Farehamyet at a subsequent stage of proceedings he was arguing that the Government are retaining the flexibility to remove those protections by order, it seems quite a serious point.

Peter Bone: My recollection was that the Minister also argued that if we did not do that, the European convention on human rights and the rights of the directors under contract law would be infringed. I agreed with the Minister then and did not press the point, but the Government now appear to have a hidden agenda.

David Gauke: I am grateful to my hon. Friend for making that point. Are we to end up with a situation where the only protection available for directors is the ECHR or will there be a place for Parliament to debate those matters too?

Mark Todd: I must admit that I did not interpret the Ministers remarks as meaning that contract law would be set aside by the executive action of the Bank. I, too, would be alarmed if it was suggested that the normal protections offered by a contract should be dispensed with at the fiat of government. I particularly welcomed the Ministers suggestion that the clause required further scrutiny by those who wished to provide greater certainty in the matter. I am not persuaded by the hon. Gentlemans argument that we should dispense with the clause and its principles in its entirety. The Minister made a persuasive case that there were areas of doubt and uncertainty to which we might need to respond, and that it would be more efficient to do so in that way. However, I take the hon. Gentlemans point on the narrow issue.

David Gauke: On the narrow issue, perhaps we will all need to reread precisely what the Minister said.

Mark Todd: I hope not.

David Gauke: Indeed. Let us put it this way: there is no reason, as far as I can see, why clause 65 could not be used to dispense with those contractual rights. The Ministers remarks merely highlight why we are concerned about the clause. The hon. Member for South Derbyshire is clearly uncomfortable with the way in which the clause could be used. We will read Hansard to see whether the Minister said that it is one possibility that the Government are already considering.

Sally Keeble: The hon. Gentleman talked about clause 4. Could he comment on the substantial protections provided under clauses 7, 8 and 9 in terms of the exercise of powers? There are the objectives, the exercise of powers and the further assurances that my hon. Friend the Minister gave about going back and looking at some important qualifications. That would seem to provide the assurances that are needed. He also said that he will come back with amendments at a later stage, which would seem to deal with the one area of doubt that was left.

David Gauke: I take the hon. Ladys point about clauses 7, 8 and 9, but this is overall a Bill that retains a reasonable degree of flexibility for the Government. My point is that regardless of clauses 7, 8 or 9, the test as to whether the law can be changed is still a very weak one. That is the objection to subsection (1).
I welcome the Ministers statement that the clause will not be used to amend the Bill and so I certainly will not press for a Division on amendment No. 157 because it does not go nearly far enough. Given that statement, however, why cannot we see that carve-out in the Bill? I hope that the Minister will consider tabling an amendment to that effect. If he does not, I suspect that we might, because it is an important point.
With regard to amendment No. 121 and the ticking clock, I am touched by the Ministers faith in business managers ability to ensure that controversial matters are debated and voted on as promptly and prominently as possible. I take his point that such debate need not always happen at the end of the 28 days, but the fact is that that is what the legislation says. It could happen so it is a weak argument to say, Well, maybe it wont. It does not say it must happen 28 days after the order has been made; it says up to 28 days. For those reasons, I am inclined to press amendment No. 121 to a vote.
I welcome the remarks, to which the hon. Member for South Derbyshire alluded, about the fact that the expert liaison group will be consulted and so on, but overall I did not feel that much comfort was provided to outside bodies or that the issue of uncertainty was addressed. It remains a concern. If one speaks to any lawyer or outside body in the field, they are worried about the breadth of the provisions. That is why we have attempted to amend the clause to narrow it down. Even those who, like the hon. Member for South Derbyshire, are persuaded that clause 65 is necessary might agree that we can at least try to restrict it to provide a little more comfort.
For those reasons, I intend to press amendments Nos. 119, 155, 120 and 121 to a Division. Members on the Conservative Benches remain deeply concerned about clause 65, and we will be voting against it at stand part.

Question put, That the amendment be made:

The Committee divided: Ayes 6, Noes 9.

Question accordingly negatived.

Amendment proposed: No. 155, in clause 65, page 32, line 15, leave out subsection (3).[Mr. Gauke.]

Question put, That the amendment be made:

The Committee divided: Ayes 6, Noes 9.

Question accordingly negatived.

Ian Pearson: I beg to move amendment No. 12, in clause 65, page 32, line 22, leave out subsection (5).

Jimmy Hood: With this it will be convenient to discuss the following: Government amendments Nos. 13 to 16.
Government new clause 5Enactment.

Ian Pearson: This is a technical amendment. The group comprises one new clause and several consequential amendments to clauses 65, 109, 122, 143 and 154. The technical amendments extend the meaning of enactment, where referred to in the Bill, to include Acts of the Scottish Parliament and instruments made under them, Northern Ireland legislation and subordinate legislation. Without express provision for the inclusion of Acts of the Scottish Parliament or instruments made under those Acts, any reference to an enactment in the Bill would not include them, which would restrict the effect of the legislative provisions of the Bill in Scotland and could limit the authorities ability to deal with Scottish banks.
Clauses 65, 109, 122, 143 and 154, as drafted, contain wording to extend the meaning of enactment for those specific clauses. However, new clause 5 will apply to the entire Bill, so the various subsections defining a reference to an enactment will be redundant. Therefore, amendments Nos. 12 to 16 make consequential amendments to remove those references. The amendments are straightforwardly technical and I commend them to the Committee.

Stewart Hosie: I have a quick question for the Minister. Obviously, in general terms, it is unsatisfactory for the UK Government to be able, almost by fiat, to overturn or change the decisions taken in another legislature. However, in the emergency situations of a failing bank and for the delivery of the special regime for a failing bank, particularly in a short period, it is probably important. I am conscious, having taken advice, that there is no particular opposition in principle, so long as the Minister can confirm that any primary or secondary legislation in Scotland that would be changed would be solely for the purposes of, or in consequence of, the Bill and in the delivery of the special regime for a failed bank. If I can have that guarantee, I would have no difficulties at all with the new clause and the amendments.

Ian Pearson: I can certainly give the hon. Gentleman the assurance that he seeks. That is exactly the intention.

Amendment agreed to.

Motion made, and Question put, That the clause, as amended, stand part of the Bill:

The Committee divided: Ayes 9, Noes 5.

Question accordingly agreed to.

Clause 65, as amended, ordered to stand part of the Bill.

Clause 66

International obligation notice: general

Question proposed, That the clause stand part of the Bill.

David Gauke: I have a quick question about clause 66(1), which states:
The Bank of England may not exercise a stabilisation power in respect of a bank if the Treasury notify the Bank that the exercise would be likely to contravene an international obligation of the United Kingdom.
I would be grateful if the Minister explained the purpose of the subsection. What interests me is that it is perfectly possible that the Bank of England and the Treasury will have conflicting views about international obligations. Indeed, there may be evidence to suggest that such a tension existed over actions taken with regard to Northern Rock last year. I put this question to the Bank of England at an earlier stage of proceedings in Committeedoes the Treasury anticipate that it will make decisions about international obligations? Will it be possible for the Bank of England to take a view not to exercise a stabilisation power because it believes that to do so would contravene an international obligation, even though the Treasury does not hold that view? In other words, will the test of international obligations be assessed by the Treasury alone, and if the Treasury is satisfied, the Bank may exercise its stabilisation powers? Or will both the Bank and the Treasury take a view, and if either institution is of the view that international obligations will preclude the use of stabilisation powers, will those powers not be used?

Ian Pearson: On a number of occasions, we have discussed the right balance of responsibilities between the authorities: the Bank of England, the Treasury and the Financial Services Authority. That division of responsibilities has been supported by stakeholders. The authorities have worked and will continue to work closely together in all those circumstances. We believe that Her Majestys Treasury should have the leading role when it comes to international obligations. The role of each authority in the SRR is clear: the FSA will assess whether a firm should enter the SRR, the Bank of England will operate the SRR and the Treasury will deal with public finances and the overall public interest and exercise the stabilisation option to take a bank into temporary public ownership, taking into account international obligations. One would expect Government to do that. That is not to say that we will not have close dialogue with the Bank of England on matters that relate to areas in which it has an interest, but it is right and proper that the Treasury takes the lead in those circumstances.

David Gauke: I am grateful to the Minister for those comments. I do not disagree with him on whether the Treasury should take a leading role. The question is whether it takes the sole role. I should like to press him on this matter. Is the origin of the clause a degree of tension that exists as a consequence of the Northern Rock issue and the view that the Bank of England took on the restrictions that applied to any covert action that it could take? There is a feeling that it took a more prescriptive view than was generally deemed necessary.

Ian Pearson: The origin of the clause lies in the consultation and the fact that we think it a necessary part of the Bill. Of course, the Treasury will talk to the Bank of England, and they will work together on all these matters. It is entirely right and proper that someone should lead and take final decisions. When it comes to international obligations, that has to be the Treasury.

David Gauke: If the Bank of England took a different view and said that international obligations prevented it from doing something and the Treasury said that they did not, would the Treasury view prevail?

Ian Pearson: I do not want to get into hypothetical circumstances, but let me make it clear that the Treasury has the lead responsibility in this regard. It will be the Treasurys views that count when considering what our international obligations are and how they should be interpreted.

Question put and agreed to.

Clause 66 ordered to stand part of the Bill.

Clauses 67 to 75 ordered to stand part of the Bill.

Clause 76

Credit unions

Question proposed, That the clause stand part of the Bill.

Mark Hoban: I have a quick question for the Minister. In what circumstances does he envisage introducing orders to apply the SRR to credit unions?

Ian Pearson: The clause creates a power to extend the SRR to credit unions. We will keep the position under review, but we have no immediate plans to extend stabilisation powers such as bridge bank, temporary public ownership and private sector purchasing powers to credit unions at this time. Credit unions have a relatively small number of depositors, and their failure does not pose the same threat to financial stability that the failure of banks and building societies might. Moreover, credit unions are dealt with effectively under existing insolvency procedures. However, it is important to keep the matter under review. We have talked about future-proofing legislation, and that is what this provision does.

Question put and agreed to.

Clause 76 ordered to stand part of the Bill.
Further consideration adjourned.[Mr. Blizzard.]

Adjourned accordingly at twenty-four minutes past Ten oclock till this day at One oclock.